Capital (5 C's of Credit)
What does it mean
In the 5 C’s of Credit, Capital refers to the borrower’s backup plan for repaying the loan. The aspects of Capital revolve around the balance sheet strength of the borrower and/or guarantor and their ability to supplement the business if necessary. A borrower’s level of Working Capital, Liquidity and Net Worth are common calculations analysized when gauging the strength of Capital.
Why does it matter
In the vast majority of loan applications, the repayment of the loan will come from future income, but when that income doesn’t come to fruition, it is good to have a backup plan. That is where Capital steps in. Does the borrower have access to other means of generating cash to pay the loan (existing cash, other working capital, assets they can sell, or assets they can borrow against).
Other Relevant Terms
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